Greece headed for “managed” default

The €130 billion rescue package extended to Greece last week forestalled a debt default by the troubled Mediterranean nation, transferring billions of euros of privately held debt onto public balance sheets and forcing the Athens to impose austerity measures.

While the deal stabilized the global financial system, it is doubtful Greece can avoid a default.

“It is important in a number of respects, [most notably] it leads toward finally reducing the Greek debt,” says Luc de la Durantaye, first vice-president, global asset allocation and currency management, CIBC Asset Management.

“We know that it’s unsustainable at this level—after this deal, it is still likely unsustainable, but at least there is a reduction in the impact that developments in Greece will have on the rest of the world.”

Just as important, the deal reduces the amount of Greek debt held in private hands, ratcheting down global systemic risk by putting a greater percentage of the debt in the hands of other governments.

“It also forms a blueprint, if there are issues with other countries,” he says.

“The impact of a Greek default has been reduced,” he says. “There is likely, in our opinion, going to be a managed default, but the impact it will have on the global economy will be much reduced.”

The challenge for Europe—indeed, the world—will be to stimulate economic growth in an environment of elevated debt.

“The market is likely to focus, over the next six to 12 months, on growth enhancing measures, especially in Europe, because they are facing fiscal austerity for a very long time.”

“It’s more important what happens in China than what happens in Greece,” he says, pointing out that the Chinese economy grows by the size of the entire Greek economy every five to six months.

“Obviously, it’s time the financial markets start focusing on China, the emerging economies and the U.S., as to what they can deliver in terms of growth. That’s more likely to determine the outlook for the financial markets, more than the outcome for Greece.”

While the world has been distracted by the unfolding Greek tragedy, central banks around the globe have been easing monetary policy, driving bond yields lower.

“This anchors bond yields are very low levels. It’s going to continue the investors’ search for yield and should sustain asset prices in the financial markets.”